Water Equity and Security in Detroit's Water and Sewer District

Section 1 - Institutional Relationships: The Great Lakes Water Authority & the Detroit Water and Sewerage Department

Section 1 - Institutional Relationships: The Great Lakes Water Authority & the Detroit Water and Sewerage Department 

THE DETROIT WATER SYSTEM reached a point of crisis in the period leading up to the bankruptcy, but the issues which produced that crisis have a long history. The restructuring of city’s finances and assets during the bankruptcy proceedings could have offered an equitable path forward– one that allowed for the fair distribution of power and resources in the region. However, the current arrangement perpetuates, rather than amends, these deep-rooted, historical inequities governing the distribution of water in Detroit. During the bankruptcy negotiations, Detroit’s emergency management, under the leadership of Kevyn Orr, eventually decided that DWSD would be regionalized into a regional water authority. This section discusses the details of that deal, showing that by failing to ensure water affordability and infrastructure improvements, as well as unfairly allocating system costs to Detroit, the current agreement codifies historical inequities. Under the new regional system, the City of Detroit has a service agreement and two lease agreements (one for water services and one for sewerage services) with the Great Lakes Water Authority (GLWA), a public corporation created in the fall of 2014 under a US Bankruptcy Court order.1 GLWA is a quasi-governmental entity and therefore does not require direct supervision by locally elected officials. The creation of the GLWA and the service and lease agreements were politically expedient solutions that were folded into the city’s bankruptcy proceedings. Examining the agreements that resulted from these negotiations reveals significant weaknesses that prevent the entire region from realizing the equitable and sustainable system it needs. In this section, we first discuss the context of folding the DWSD into the city’s bankruptcy proceedings, the primary antecedent of which is the creation of the GLWA and, in turn, the city’s service and lease agreements. Second, we identify five key structural flaws in the GLWA service and lease agreements. We argue that the current agreement perpetuates, rather than amends, the historical inequities governing the distribution of vital resources in Detroit.

DWSD and the Detroit Bankruptcy Negotiations

It has been argued that DWSD should not have been included in the bankruptcy proceedings in the first place. Bankruptcy law governing municipal bankruptcy, unlike corporate bankruptcy, does not involve the liquidation of municipal assets to settle debts. Rather, in the context of municipal bankruptcy, the scope of negotiations is limited to annual revenue and expenses. 

DWSD’s debt was included in the calculation of Detroit’s total municipal debt, even though DWSD served a region much greater than the city of Detroit. Detroit was only a fraction of the water department’s service area, but its debt was attributed to Detroit alone. In his 2013 analysis of the calculation of Detroit’s municipal debt, Wallace Turbeville calls attention to the: 

Additional $5.8 billion is debt [that is] owed from the Water and Sewerage Department, which serves in excess of three million people all across southeastern Michigan (roughly 40 percent of the state’s population). The debt is payable from the fees charged for that service rather than from city resources. This is debt of an enterprise that reaches far beyond the city and is not a direct obligation of the city’s budget. Thus, asserting that the total bond amount is a liability of the city is not appropriate.2

Despite arguments like this one, DWSD was included in negotiations, and what should have been one of Detroit’s greatest assets became one of its biggest liabilities.

When the city was under state-imposed Emergency Management, several of the city’s assets and real estate—which could have laid the foundation of future economic development and growth—were considered properties whose value could be used in creditor settlements. For example, Detroit’s waste collection and public lighting systems were both privatized.3

Image of city street from the film I Do My Dying. Coutesy of Kate Levy, available online at detroitmindsdying.org

Image from the film I Do My Dying. Coutesy of Kate Levy, available online at detroitmindsdying.org

Another example is the city’s settlement with Syncora—one of the city’s bond insurers—whereby the firm was granted development rights to just under 12 acres of east riverfront land, where it plans to develop 2.2 million square feet of mixed-use space.4 In total, Syncora claimed a $333 million debt from Detroit, which was settled with $44.8 million in new debt, development rights to riverfront land, a long-term lease to operate the Detroit-Windsor Tunnel, a long-term lease of Grand Circus Park parking garage, and development rights to the former Detroit Police Department headquarters 250,000 square foot building.5 Another bond insurer, Financial Guaranty Insurance Corporation, was granted development rights to the Joe Lewis Arena, an area of about nine acres, where the firm plans to build a hotel.6

The selling-off of municipal assets during the Detroit bankruptcy negotiations speaks to the way in which municipal fiscal distress can be beneficial to the private sector, and to private sector developers in particular. 

The Detroit Water and Sewerage Department constituted one of the city’s most valuable assets, and its fate was up for negotiation during the bankruptcy proceedings. One possibility was to privatize the utility. Another was to regionalize the system, creating a new regional authority. This was not a new idea—there had been efforts to transfer the asset to a regional authority for some time. One such attempt occurred in the state legislature in 2010, when State Representative Kurt Heise campaigned to put DWSD into regional management and operation, introducing House Bill 4112 in January 2011.7 Rep. Heise introduced an equivalent bill, House Bill 4009,8 in January 2013. Neither of these legislative attempts to transfer DWSD to a regional entity gathered enough interest or support to move forward.

There was another attempt at regionalization included in the EPA case proceedings. On March 27, 2013, the US District Court Judge Sean F. Cox issued the court opinion and order ending the protracted 1977 lawsuit between EPA and DWSD.9 Cox had dismissed the city’s earlier request to dismiss the suit and ordered a team of administrators and officials to meet and create a plan that would enable DWSD to meet the environmental regulatory standards of the Clean Water Act. This group came to be known as the “Root Cause Committee” and met between September 2011 and March 2013.10 In March 2013, the Root Cause Committee submitted a final plan proposing a new operational model for DWSD that centered on the creation of a regional authority to operate and manage DWSD.11

In the case’s closing proceedings in March 2013, Cox found the Root Cause Committee’s submissions adequate to end the suit, deeming the 2011 administrative consent order a “sufficient mechanism to ensure sustained, compliance” with federal environmental regulations.12 However, on the matter of creating a regional water authority, the judge ordered that the court lacked the authority to transfer DWSD assets to a regional authority given its limited role in enabling DWSD to meet federal compliance. The court’s opinion explained, 

Even if this Court had the authority to order what is now being proposed, the Court would not do so for multiple reasons. Arguably, if the Court were to order or approve the transfer of one of the City of Detroit’s largest assets, at this juncture, that could potentially force the City into bankruptcy or have other highly undesirable consequences. If the City of Detroit and/or its regional customer communities wish to pursue the creation of a regional authority, they may do so through the political/legislative process.13

However, during the bankruptcy negotiations— which began just weeks later—the possibility of regionalization re-emerged. The prospect of transferring valuable water and sewerage utilities to quasi-governmental authorities or private entities is a national trend—one that follows an even longer practice internationally. In 2011, for example, Pontiac, Michigan signed a service agreement which transferred management of their water system to United Water, a subsidiary of the global water firm Suez.14 Similar institutional restructuring of public water and sewerage systems has occurred in many places, including Montana, Indiana, Arizona, and Kentucky.15

Generating revenue for local governments by transferring ownership of water and sewerage infrastructure can be appealing for local governments—but it is equally, if not more, appealing for the entities who benefit from control of the asset. Nationally, the private sector value of structures associated with water supply, sewage, waste disposal, public highways, and streets are incredibly high. 

At the time of Detroit’s filing for bankruptcy, DWSD constituted one of the city’s most valuable assets. With Detroit and the DWSD in crisis, on April 7, 2014 Emergency Manager Kevyn Orr put out a Request for Information for private contractors interested in managing the system.16 While Orr was receiving bids for privatizing the system (leasing or selling), he was also negotiating with suburban representatives about regionalizing DWSD under a new regional authority.

Terms of the Lease and Services Agreements

Ten months into bankruptcy negotiations, a plan to transfer DWSD to a regional authority—the newly created Great Lakes Water Authority—was approved by the court. Leasing a system is one option for transferring ownership to quasi-governmental entities, as the prospect of an annual lease payment can be appealing to local governments struggling with local revenue crises. 

Under the current agreement, GLWA leases Detroit’s suburban infrastructure for $50 million per year for 40 years.17 The agreement, finalized in 2015, requires that Detroit continue to manage and maintain its municipal water system under a new, limited entity: DWSD Retail (DWSD-R). 

The lease payment—the $50 million annual payment, $13.5 million of which comes from Detroit, as the payment is considered a “common-to-all” cost—is held in a fund belonging to the Authority. That fund is used exclusively to maintain Detroit’s water and sewerage infrastructure, to pay debt services associate with those improvements, or to contribute to the common-to-all improvements in the system.

Suburban customers—not users who live in suburbs, but the suburbs themselves—are “wholesale customers” of GLWA, rather than being wholesale customers of DWSD as was the case under the previous arrangement. Suburban municipalities purchase water and sewerage services at a wholesale rate and sell it to suburban residents with a retail markup. Just as DWSD used to do, GLWA sells water to suburban municipalities at a price that strictly covers the cost-of-service. The suburbs then add a retail price when selling to residents to cover their own costs. Each suburb sets its own markup and keeps its own revenue.

GLWA also assumed responsibility for DWSD’s bonded indebtedness and committed to putting $42.9 million dollars towards DWSD pensions over the next eight years, as well as committing to an additional $26 million annual payment as an annual return on equity in recognition of the city’s ownership of the system.18

Image of dark, cold basement from the film I Do My Dying. Coutesy of Kate Levy, available online at detroitmindsdying.org

Image from the film I Do My Dying. Coutesy of Kate Levy, available online at detroitmindsdying.org

The Agreement also created a GLWA board, which, in 2015, included six members: two appointed by the Detroit mayor, one each by Wayne, Oakland, and Maycomb counties, and one by the Governor. In November 2017, Flint rejoined GLWA and the city’s agreement with GLWA states that the governor’s appointee for the board will resign and the governor will appoint a Flint resident to the seat.19 Any major decision—including the appointment of the authority’s general manager; approval of rates, fees, and charges; issuance of debt; approval of budget; and adoption of procurement policies—requires supermajority approval.

GLWA operates and manages suburban water and sewer lines and as well common-to-all assets within Detroit, like the wastewater treatment plants and some CSO basins.20 These costs are shared among all the regional municipal customers and Detroit– more about how cost are shared with in the agreement is detailed below. 

The GLWA lease agreement also allocated $4.5 million in 2014-15 (and 0.5 percent of base budgeted operating revenues in years thereafter) to fund a Water Residential Assistance Program (WRAP). WRAP is intended to provide assistance to indigent customers throughout the region, and again, is described in more detail below. 

The terms of the service agreement and two lease agreements were decided behind closed doors and without meaningful and sufficient consultation with Detroiters or their elected officials. As a result, the process has received substantial criticism, with critics citing the tension between emergency management decision making, community accountability, and democratic participation. 

An analysis of the terms of the agreements reveals that the creation of the Great Lakes Water Authority (GLWA) and the resulting lease and service agreements are clearly weighted against the interests of Detroit. Instead of an ownership and governance structure that clearly delineates responsibility and authority, the void of representative democratic practice created during the bankruptcy and emergency management permitted a complex and inequitable transaction structure that has incredibly important, long-term impacts on the city of Detroit.

Points of Concern

The DWSD/GLWA agreement poses serious threats to the environmental, social, physical, and economic well-being of Detroit and of Detroit’s residents. The following discussion outlines the principal ways in which in this agreement puts the city at a financial disadvantage and threatens Detroiter’s access to safe and affordable water and sewerage services.

Primary concerns with the terms set by the lease agreement fall into five categories:

  1. The agreements are not based on an adequate valuation of the DWSD system, and correspondingly, the annual lease payment is inadequate.
  2. The allocation of costs within the agreements is unfairly burdensome for Detroit and does not take regional inequities into account
  3. The current agreement inhibits the development of a rate-setting structure that effectively recovers costs while ensuring equity, efficiency, and sustainability.
  4. Several aspects of GLWA’s governance structure stifle Detroit’s voice in making decisions about its own system and make it difficult for Detroit to rework the terms agreement should conflict arise.
  5. The agreement fails to adequately address the issue of water affordability and effectively safeguard the human right to water for residents across the region.
  6. This figure outlines the 5 elements of the flawed GLWA agreement.

Lease payment

During the GLWA negotiations, Detroit’s water and sewerage infrastructure was not properly appraised, and the resulting lease payment is arbitrarily and detrimentally low. While the exact value of the system will not be determined until it is officially appraised, it is apparent that the $50 million annual lease payment is insufficient. 

Importantly, the $50 million annual lease payment is a cost shared by all wholesale customers—including DWSD-R. In FY 2018, Detroit will contribute $13.5 million to the $50 million lease, leaving the suburbs to cover only $36 million.21

The vast inadequacy of a $36 million lease payment is especially clear when considering the value of similar systems. The 2017 sale of Aquarian Water to Eversource Energy offers a helpful example. The $1.7 billion sale combined Connecticut’s largest water and energy companies, and Eversource paid $880 million is cash for Aquarian’s system, also assuming $795 million in Aquarian’s debt.22

Detroit’s regional system is much larger than Aquarian’s, which serves 625,000 people.23 Detroit’s system serves 6.25 times as many people: about 3,900,000. As of 2016, the debt carried on the Detroit system was much larger, $5,548,324,503.00.24 However, that debt breaks down to $1,450.00 per user, as compared to $1,272.00 per user in the Connecticut utility. So, in other words, when adjusted for system size, the debt burden is quite similar. 

In the Connecticut example, $880,000,000 was paid to the Owner representing the market value over the indebtedness, that’s $1,480.00 per user. Applying that same market analysis to Detroit gives a market comparable value of $5,385,600,000.00 over the indebtedness. That is over $5 billion in equity that was not reflected in the GLWA transaction

As we describe in the “Recommendations” section of this report, imputing a reasonable lease rate of interest to the rental structure, Detroit should be paid four percent annual interest on the value of the asset, or $215.4 million per year. That is 5.8 times what it is currently being paid. 

The fact that negotiations led to a lease and not an outright sale of the infrastructure allowed the lease payment to be set at so low a cost. While a sale would have required a comprehensive assessment of the asset’s value, negotiating a lease payment did not. The circumstances of the creation of the regional water authority—namely, that Detroit was in the midst of a municipal bankruptcy and under emergency management—gave rise to a transaction that would not have occurred under normal circumstances and is, correspondingly, blatantly inequitable. 

This issue is at the center of the inequities with the agreement. In order for DWSD to be able to supply affordable, high quality water to all its customers, the annual lease payment must reflect the value of the system as it is assessed through proper review. This is the fundamental issue with the agreement as it stands today, and until it is addressed, a truly just and sustainable water system in Southeast Michigan cannot exist. 

Cost allocations

Additionally, the allocation of costs within the agreement is unfairly burdensome for Detroit and does not take regional inequities into account. Under the lease agreement, some costs of operating and improving the regional system are considered “common-to-all,” meaning that DWSD-R and wholesale customers contribute to them, while others are “Detroit-only” or “customer specific.” Under the currently system, the ways costs are allocated within these classes is inequitable to Detroit and endangers the sustainability of its water and sewerage infrastructure. 

For example, under the current arrangement, the $50 million/year lease payment is a common-to-all, meaning that Detroit contributes $13.6 million to the lease payment on its own system. The proposed Water Residential Affordability Program (WRAP) is also a common-to-all cost. 

On the other hand, substantial costs associated with the combined sewage system are largely left to Detroit. 

The enormous expense of the combined sewage system is rooted in with the way in which sustained historical neglect of necessary capital improvements to Detroit’s infrastructure has left the city with an antiquated combined sewer system (CSS). In a combined sewer system, sewage, greywater, and stormwater all mix within the same system and are all transported to the same wastewater treatment plants. This type of sewerage system is no longer built, and converting a combined sewer into a separate sanitary sewer—in which stormwater is separated from sewage and greywater treatment—is exceptionally expensive. This is one of the reasons why over 800 communities in the United States continue to depend upon combined sewerage systems.25

In the regions, 3,800 miles of sewer are in Detroit and 8,770 miles in suburban areas. Of the 8,770 miles of suburban sewer, only 970 miles are combined sewer systems, while the vast majority of Detroit’s sewer is combined sewer.26

The primary issue with CSS is environmental risk of combined sewage overflows (CSO) and the substantial costs of preventing those overflows. During wet weather, the sewerage system takes in an increased volume of stormwater, in addition to greywater and sewage. This additional intake of stormwater can make the volume of water exceed the system’s capacity. In these cases, there is a risk for the sewers to overflow, and for the overflow—containing sewage and industrial waste—to be discharged directly into freshwater. These overflows present acute environmental and public health threats, and municipalities with combined sewer systems are required by the EPA to take protective measures to avoid CSOs—or else incur heavy financial penalties. These preventative initiatives can take the form of either “grey” or “green” CSO management.27

The measures required by the EPA are incredibly costly, and under the current agreement, those costs are inequitably allocated to Detroit. The current agreement requires that Detroit covers 83 percent of the costs associated with several of the grey CSOs leased by the regional system, while the wholesale customers cover only 17 percent.28 There is one exception– The Belle Isle CSO Retention Basin– which is paid for by Detroit exclusively. This 83/17 split is rooted in the unfair and non-transparent “1999 Rate Settlement Agreement,” implemented while DWSD was under federal oversight.29

Additionally, Detroit is required to cover 83 percent of the costs of future grey CSO management facilities which are deemed to “primarily serve Detroit”– a distinction which is unclear considering that the systems are, literally, interconnected.30 In addition to covering 83 percent of the costs with existing grey CSO control facilities and perhaps that of new facilities, Detroit is also left to cover 83 percent of the expenses associated with the construction of new green CSO control systems.31 The new facilities are hugely expensive, with those initiatives currently planning costing over $50 million in capital investment over the next four years.32 Those costs will likely increase over the course of the lease, given increased pressure on the system due to climate change, as well as continued deterioration of Detroit’s system.

Leaving Detroit responsible for 83 percent of CSO costs is inequitable for a variety of reasons. The logic behind the 83/17 split is likely rooted in the fact that most of the combined sewage system is in Detroit; however, though Detroit does contain the majority of the combined sewage system, the system is a regional responsibility. 

One reason for this is that Detroit acts as the backbone of the region, housing highways, universities, hospitals, and governmental buildings that are used by people throughout Southeast Michigan. Much of the drainage entering the system– and contributing to CSOs– is related to the large impervious services required for those amenities. The costs pertaining to other entities that serve the region but are located in Detroit, such as the wastewater treatment plants are common-to-all; this ought to be the case for CSO costs as well. 

Additionally, the fact that Detroit has an antiquated system such is because of the sustained historical neglect of Detroit’s system, which is a product of the way in which Detroit enabled suburban growth, described in Section I. Thus, the costs associated with maintaining the city’s aging infrastructure are not the responsibility of the Detroit alone.

The consequences of the inequitable allocation of costs under the current agreement are detrimental to the well-being of Detroit’s system and the fiscal well-being of Detroit. To cover the costs of CSO management, the city is forced to charge high unmetered drainage fees to DWSD-R customers. Currently, DWSD-R customers pay a monthly fee of $750 per impervious acre.33 These drainage fees are not only burdensome for Detroiters, but as described in Section III, actively threaten the livelihood of community spaces; the existence of many Detroit churches, for example, is endangered due to their inability to afford the fees.34

Under the current agreement, costs–particularly the lease payment and CSO costs–are allocated in unfair ways, which does not take into account the ways that historic divestment and austerity has created lasting expenses associated with Detroit’s crumbling infrastructure. The sharing of costs under the GLWA agreement could have provided a vehicle to amending the region’s unfair history, but rather, given the current structures for sharing costs, perpetuates it.

Rate structure

Pricing policies are a key component in determining utility provider’s cash flow, and what is factored into the calibration of rates plays a key role in determining equity. However, the current GLWA/DWSD agreement inhibits the development of a rate-setting structure that effectively recovers costs, while ensuring equity, efficiency, and sustainability.35

Notably, GLWA inherited DWSD’s historic rate-setting structure. As evidenced by the DWSD’s massive debt and use of shutoffs in its final years, that rate-setting structure failed to effectively recover costs and ensure the human right to water. With the creation of the GLWA, those rate-setting structures were not reconsidered. 

Through the lease agreement, GLWA has ultimate authority to establish rates for both Retail and Wholesale customers.36 However, DWSD-R assumes this responsibility, along with billing and collections as detailed in the services agreement, but is ultimately subject to GLWA’s approval.37 Notably, DWSD-R will be subject to the same rate increases as other wholesale customers; customers with greater or similar economic conditions than Detroit.38 On the other hand, there are suburban wholesale customers that could reasonably sustain a rate increase, especially if there was in effective affordability plan in place to serve the needs of low-income people in those jurisdictions. After all, GLWA’s base water rates, inherited from DWSD, are low as compared to similar places. 

Importantly, the agreement contains obstacles to fundamentally reconsidering GLWA’s rate-setting structure, which would be required for effective cost-recovery, as well as for guaranteeing affordability, conversation, and economic development. 

The four percent cap on rate increases under the current agreement is one of these. The current agreement sets a rate increase cap of four percent for the first 10 years of the 40-year lease agreement.39 Depending upon the future decisions and practices of the GLWA, the four percent cap could present significant limitations recovering costs, and in particular, for funding a water affordability program and improvements on Detroit’s urban infrastructure. 

Note that the percent cap on rate increases has a notable exception. The rate increase can exceed four percent if the increase is required to meet legal obligations GLWA and DWSD-R.40 Costs associated with meeting the terms of the long-term compliance schedule between DWSD and EPA are quite high—perhaps as high as $1 billion.41 Given the likelihood of increased regulatory issues with the regional water infrastructure, it is probable that rates will likely increase beyond four percent, which may pose threats for affordability in low-income communities.

At the same time, the four percent cap may also hamper the ability to fund large-scale improvements on Detroit’s urban infrastructure: the most antiquated in the region. Because GLWA and DWSD-R plans together to address capital needs of their shared system, a four percent cap on other wholesale customers can limit the amounts available to meet the needs. Lacking funds for largescale improvements is particularly burdensome for Detroit, as their urban infrastructure is in most need of improvement. Failing to improve Detroit’s infrastructure not only further marginalizes the city, but also compromises the sustainability of the entire regional system.

Additionally, the four percent rate cap is based upon an insufficient valuation of the true costs of water affordability. Notably, the cap factors in the costs associated with the currently-in-place Water Residential Assistance Program (WRAP).42 As is empirically evident in Detroit, water poverty persists despite the WRAP program. Not only is the WRAP plan inadequate to meet the needs of Detroiters, it’s inadequate to meet the needs of struggling customers across the region. The costs for an effective program well exceed the figure used to determine the asserted adequacy of the four percent rate cap. This point is discussed particularly at the latter part of this section, as well as Recommendation 5 in this report.

GLWA rate-setting structure ought to be reconfigured to include the full costs of necessary improvements to the infrastructure that needs it most as well as a robust affordability plan. After all, the core purpose of the utility is to deliver palpable water to all customers in the service area and discharging and treat sewage from customers in service area, while also meeting legal obligations and assuring the fulfillment of the human right to water. Figuring these elements into the cost-of-service model, and relatedly, rate-setting structures, may result in increases above or below four percent, which may vary based on resources available from wholesale customers. Of course, any increase in water rates must be accompanied by a robust water affordability plan.

Governance

Several aspects of GLWA’s governance structure stifle Detroit’s voice in making decisions about its own system.

One issue is that the structure of the GLWA board limits the power of Detroit in making decisions about its own system. As previously mentioned, the board includes two members appointed by the Detroit mayor, one member each by Wayne, Oakland, and Maycomb counties, one appointed by the Governor who will resign and be replaced by a Flint resident.43 A supermajority is required for all major decisions, including the appointment of the authority’s manager; approval of rates, fees, and charges; issuance of debt; approval of annual operating budgets; and approval of capital improvement plans.44

It could be argued that Detroit has “more” influence on the board relative to other whole sale customers based upon two seats designated for mayoral appointments. However, with only six seats and five votes required to approve influential actions, the degree of the city’s influence on board decisions is moderated. As these non-Detroit parties’ interests are more closely aligned with each other and much less inclined to address the historic inequities represented by the existing infrastructure system, Detroit’s influence in the GLWA is greatly diminished.

To underscore the severity of the imbalance of the GLWA board, one only has to look at the September 20, 2017 draft of the GLWA “One Water” partnership agreement.45 The partnership appears to create a second governance structure comprised of 84 named municipalities, the Great Lakes Water Authority, the city of Detroit, the Michigan Department of Environmental Quality, the Southeast Michigan Council of Governments, and consultants representing any of those members. 

The responsibilities of the partnership closely parallel those of GLWA board. Among the common goals of the partnership is a commitment to work toward consensus on each issue. Depending on how “most of the membership” is defined, this is remarkable. A majority vote—whether super or simple majority strengthens more homogeneous suburban interests with the representation of smaller concerns relevant to the city of Detroit and Flint. This parallel governance structure further dilutes the voice of DWSD, Detroit, and Flint which comprise only a tiny fraction of the parties at the table. The regional authority has over eighty voices behind it, while only a few representatives speak to the needs of Detroiters.

This echoes the long history of Detroit being marginalized in their influence of decisions about a system designed, maintained, and expanded by the city. The board structure, as well as extra-board organizations such as the One Water Partnership, stifle Detroit’s influence in an environment that has already devalued their asset and investment.

The limitation of Detroit’s voice in the GLWA board and extra-board organizations echoes the trend of limitations on democratic representation during the bankruptcy process. In fact, although the city’s bankruptcy plan was approved by the federal court, the city’s autonomy over its own finances has yet to be returned to the city three years after its bankruptcy process. The Michigan State Treasury’s Financial Review Commission must approve city budgets and contracts.46 Although the city’s subjection to this Commission could come to a conclusion as early as March or April 2018, the agency that the mayor could exercise or the agency that could be exercised by city representatives on GLWA board is understandably limited. Currently, these are very official inhibitions placed on city agency, and even after the official inhibitions are dissolved, it’s feasible to imagine a persistent trail of policies left in the wake of the Commission’s suppression of Detroit’s democratic voice. 

Another issue with the agreement’s governance structure pertains to the consequences of Detroit either failing to meet the terms of the agreement or opting to withdraw from the authority. It is very possible that Detroit will be unable to meet its obligations under the GLWA agreement, especially given the lack of clarity in the way costs with be shared in the system. This is in part due to the way in which within the lease and services agreements, the GLWA possess important power—but it does not lease the entire infrastructure system within the geographic boundaries of the city. Rather, the documents outline what has become an entirely artificial division between what “parts” of the infrastructure are Detroit’s and which parts are GLWA—from the size of pipes to vehicles and office space. 

Also described in these documents are the complexities of how this distinction will be managed. Detroit’s parts and GLWA’s parts are associated with different costs and different upgrade projects. However, there is little detail on how these responsibilities will be distributed between Detroit and GLWA. CSO costs are a notable exception. And, more importantly, there is little specification on how decisions regarding these plans will be made. It appears that a central point of making these distinctions will come through DWSD-R’s obligation to submit a budget and capital improvement plan to GLWA every year.47 The documents contemplate the need for sharing and coordinating efforts to share obligations to what is, in effect, a single system. However, it seems that concretized decisions on how to share these duties will be run through GLWA board decision-making, a mechanism wherein Detroit’s voice is severely limited. 

The artificial division of what is a single system can create significant difficulties for DWSD-R to meet its obligations under its services agreement with GLWA. For example, if GLWA increases rates then DWSD-R along with other customers will have new revenue requirements to meet. For DWSD-R there are these increased revenue requirements, but also there is the variety of unknown additional costs for management of its own local system—a system that is the same as that of the GLWA despite however detailed the agreements’ lists of specific assets are. One issue, for example, is the lack of transparency about the ways that costs associated with capital improvement plans or longterm compliance schedules will be shared. Barriers to Detroit meeting its obligations under the lease are compounded by the city’s poor credit ratings, and correspondingly, inflated costs for debt service. Additionally, the utility has substantial challenges in recovering revenues, given the high proportion of low-income people in the DWSD-R service area. 

The terms of the agreement are incredibly unfavorable for Detroit should the city fail to meet the terms of the agreement. DWSD-R can lose its ability to set rates, issue bills, or establish collection practices, and instead GLWA could take over those duties.48 Additionally, should conflict arise between GLWA and DWSD-R, dispute resolution occurs through an arbitration process that blocks access to courts.49 And if the city opts to withdraw from the Authority, Detroit can forego future lease payments.50 As the agreement states, that any such withdrawal will not terminate this Lease or affect the Assignment and Transfer, or affect the Revenues collected by the Authority.”51

Ultimately, the agreement limits Detroit’s agency, which is a serious concern considering how unfavorable the agreement is for the city. Leases ought to reflect clear and fair contractual agreements. In the case of the GLWA/DWSD agreement, the agreements more closely resemble an unfair sale. In fact, as states in the agreement, “Notwithstanding the foregoing, this Lease shall constitute a bill of sale from the City to the Authority pursuant to which the city conveys all of its right, title and interest in and to the personal property that is part of the leased water facilities.”52

DWSD is not like other GLWA wholesale customers and the governance structure and the relationship between the city and the GLWA should reflect that. Not only did the city own and create the asset, the city was also the regional hub for economic and social development; the agreement’s governance structure ought to reflect that. 

Affordability programs

The current water affordability plan in Detroit is the Water Residential Assistance Program (WRAP), which provides funds to subsidize repayment on overdue accounts.53 Under WRAP, which began operating in Detroit in March 2016, DWSD customers at or below 150 percent of the federal poverty line are eligible to receive a $25 monthly bill credit and have their debt frozen for 12 months. Customers who successfully make monthly payments for one year are then eligible for a $700 credit towards their debts. Additionally, customers exceeding 120 percent of average household water consumption can receive a free home water conservation audit and, based on the audit, may receive up to $1,000 for repairs. Customers must have a delinquent bill or shutoff status to be eligible

DWSD did not appear to anticipate the assistance program’s weaknesses. DWSD director Gary Brown insisted that WRAP is “a very robust, comprehensive program that addresses all of the issues I’ve seen in the past that causes people to fall out of a plan.” However, by August 2016, just five months into the assistance plan’s implementation, program funds ran dry, and customers who sought assistance were turned away.54 In 2017, out of 18,749 completed pre-applications, only 6,402 households were enrolled.55

Activists and experts in affordable utilities point out that the plan is markedly inadequate and fails to address the root issues of water affordability and prevent shutoffs. It is important to note that WRAP is an assistance rather than affordability plan; it offers a short-term, insufficient solution for residents whose bills are simply unaffordable.

As described by Lynna Kaucheck, a senior organizer for Food & Water Watch, “These assistance programs are not helpful for people who have real, long-term affordability problems… These programs are going to continue to fail because it’s not really addressing the problem.”56 The sheer degree of shutoffs following the implementation of the plan also speaks to its inability to address the issue of water unaffordability. People want to pay their bills, and they want to have access to water, and a true affordability plan would make this possible. 

In 2005, Roger Colton worked with Michigan Welfare Rights Organization (MWRO) and DWSD to design a Water Affordability Plan (WAP).57 Colton’s WAP proposed a rate structure based on DWSD users’ income (we propose a regional version of this plan in Section IV of this report). Income-based plans address the root causes of unaffordability and ensure that water and sewerage rates do not exceed an affordable burden. The plan also recommended abolishing late payment fees and educating residents about water conservation.

Economist and utility services expert Roger Colton has explained that the issue of water affordability affects everyone, not only those who are unable to pay:

Providing water affordability assistance is critically important from everyone’s perspective. From the customer’s perspective, having affordable water often is the primary factor that determines such fundamental issues as whether someone can stay in their home or retain custody of their children. From the water provider’s perspective, it makes little sense to issue bills that people cannot afford to pay. In such circumstances billed revenue does not translate into collected revenue. The water provider ends up spending more and more money in a less and less successful effort to collect its bills. From a community’s perspective, unaffordable water service drives up health care costs (borne by everyone), impedes childhood education (thus continuing the cycle of poverty), destabilizes neighborhoods, and makes communities less competitive to businesses seeking places to locate. From an environmental perspective, unaffordable water service frequently (if not generally) prevents local governments from investing in the infrastructure improvements to meet clean water objectives. As can be seen, unaffordable water is not simply a poverty issue. It is a health care issue, a housing issue, an education issue, a business development issue, an environmental issue. Any reasonable local official must recognize that unaffordable water service is a problem that must be addressed and resolved.58

Additionally, as Colton’s 2005 Water Affordability Program (WAP) states:

In the energy arena, ample research has found that many low-income customers pay their home energy bills at significant personal sacrifice to themselves and the members of their households. Low-income consumers may forego buying medicine, food, insurance, and dental care. Low-income consumers have been reported to heat their homes with “alternative fuels” including used tires, newspapers, clothing and furniture in order to pay for their heating bill. Low-income consumers have been reported to pawn their possessions, abandon their homes for days or weeks at a time, and reduce their heating to unsafe levels in order to pay their heating bills. These consumers are no less “payment troubled” than their counterparts who simply do not pay their bills. The same results would arise with water bills. In sum, payment troubles are a manifestation of the affordability problem. They are not the problem itself.59

Residents are not choosing to fall behind on payments or to go without water. Bills are simply unfeasible for low-income Detroit residents to pay. 

WRAP’s failure to address the underlying issue of water affordability creates a system that is perpetually in crisis. The creation of the GLWA thus failed to address the crucial issues of water affordability in Detroit by providing an underfunded regional assistance, rather than affordability, program. Detroit lost its most valuable asset and failed to secure affordable water for its residents.

Conclusion

The current GLWA lease and services agreements with DWSD and other related agreements with DWSD that preceded the GLWA contains multiple areas for concern. The cluster of agreements have legally installed structural constraints on GLWA and DWSD. The design process and deliberation on terms have not been adequately transparent or created in a context of public debate and influence. The features are of great consequence for DWSD because of the consequences of failure to meet any of its obligations. Desgins for DWSD’s obligations are problematic and can be argued to be difficult for DWSD to meet. Some people have discussed the documents design to “set Detroit up for failure.” In identifying key structural design flaws in this section, we are able to locate structural barriers for DWSD and its customers to maintain even a modicum of local control and benefit from the regional asset. 

For example, the cost sharing and rate structure do not allow for many probable scenarios that DWSD could experience For example, the terms also are not designed to account for a robust affordability program that addresses long-term revenue challenges for Detroit residents that are unable—not unwilling—to pay. The problem of the system providing water access, environmental quality, and public health throughout the region is a profound problem and inhibits the mission of DWSD—but also inhibits the mission of the GLWA. These structural features between DWSD and GLWA are also relevant for other retail customers in the regional service area. More prosperous and other struggling retail customers should also inspect and critically appraise their agreements with GLWA. Some have suggested that the design of GLWA is to consolidate its unilateral control of the regional system. 

At this stage of analysis, the intention of GLWA is not clear. However, structural flaws and severe consequences of retail customers to meet GLWA service agreements should be rigorously reviewed and the decision making around these agreements should be made available for such review.

It is likely that the lease payment is based upon a deflated value of the DWSD system. It is not at all clear that the amount of the lease payment was tied to a consideration of the value of the system. This is an area for concern since the lease payment constitute an important part of DWDS’s capacity to meet its obligations under the agreement. The lease payment is also an important part of other retail customers to structure their rate structure and fulfill their missions to ensure high-quality drinking water and adequate wastewater services and ensure their system’s contribution to regional environmental quality and public health. 

Second, the way in which costs are allocated within the lease agreement is not clear. In this lack of clarity and transparency there is limited room for analysis. However, the separation is seen to be arbitrary and unfair by institutions and residents throughout Detroit. Designing a separation of operation, management, and maintenance tasks across the regional system and the portion of the system within Detroit is exceptionally complex and the rationale of this separation is unclear. This is particularly evident in the way in which the lease payment is common-to-all, while costs pertaining to CSO management are not. 

Thirdly, the agreement contains provisions which inhibit the development of a rate and pricing structure that ensures equity, sustainability, and efficiency. Rates may need to increase by more than four percent (the limitation imposed by the GLWA/ DWSD agreements) to provide for these areas. Again, in this case, the rationale of the 4 percent cap is not clear.

Fourth, the governance structure of the GLWA board limits the influence of Detroit and ability to influence decisions about its own system. Flaws within the governance of GLWA are also of consequence to other smaller financially struggling cities within the region.